Optimal stopping time with stochastic volatility

Ran Zhang and Shuang Xu

Economic Modelling, 2014, vol. 41, issue C, 319-328

Abstract: This paper demonstrates how to convert a path-dependent optimal stopping time problem into a path-independent problem using a transformation analysis method. We test this method to deal with several problems, especially those in stochastic volatility environments. We introduce stochastic state variables into volatility dynamics and analyse the influence of state-variable volatile characters on investment stopping boundaries. For arbitrary coefficient circumstances, we set up a Riccati equation that satisfies the transformation. For circumstances involving Heston stochastic-volatility, we propose an analytical solution. This paper extends research on the optimal investment stopping issue to a stochastic investment opportunity environment. Our proposed method can enhance the ability of optimal investment stopping theory to describe the real capital market.

Keywords: Investment stopping time; Optimal selling rule; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: G11 G13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999314001837
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:41:y:2014:i:c:p:319-328

DOI: 10.1016/j.econmod.2014.05.016

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().